MARC affirms AAAIS rating on TNB Northern Energy's outstanding RM1.475 billion sukuk

MARC has affirmed its AAAIS rating on TNB Northern Energy Berhad's outstanding Islamic securities (sukuk) of RM1.475 billion with a stable outlook.

TNB Northern Energy is a wholly-owned subsidiary of TNB Prai Sdn Bhd and was set up to construct a 1,071.43-MW combined-cycle gas turbine power plant in Seberang Perai Tengah, Penang. TNB Prai in turn is 100%-owned by Tenaga Nasional Berhad (TNB, rated AAA/Stable). The power plant commenced operations in February 2016 and has been receiving availability-based revenue under a 21-year power purchase agreement (PPA) with offtaker TNB.

TNB Northern Energy’s AAA rating is equalised to the rating of TNB, based on, among other factors, TNB’s financial commitment to provide a rolling, unconditional and irrevocable guarantee for an amount equivalent to the next six-month financial service of the sukuk. TNB has also provided an undertaking to maintain full ownership of TNB Northern Energy and TNB Prai. The substantial operational and financial linkages between the entities further underpin the rating equalisation. Consequently, any change to TNB’s credit profile or the ownership of the power plant could impact the rating.

TNB Prai achieved higher availability target (AT) of 96.16% in 2018 (2017: 91.10%) on the back of relatively lower outage rates, which led to higher contractual average availability target (CAAT) of 94.08% for contract year block from 2016 to 2018. The CAAT is marginally higher than the minimum 94.00% required under the PPA and therefore no penalty charges will be levied. The higher capacity payments of RM190.7 million led to lower pre-tax losses of RM21.7 million (FYE August 2017: negative RM41.0 million); nonetheless, capacity payments remained lower-than-budgeted due to plant outages. Of the power plant’s two generating units, Unit 10’s unplanned outage rate (UOR) of 7.9% exceeded the 6.0% limit while Unit 20’s UOR improved to 2.08% from 13.6%.

Since achieving commercial operations in 2016, the plant has not achieved full capacity payments, underscoring the reliance on TNB for financial support. In the projected scenario, the average base case finance service cover ratio is 1.22x with a minimum level of 1.00x in 2022. The cash flow projection assumes receipt of shareholder’s advances of between RM2.4 million and RM59.9 million throughout the sukuk tenure due to insufficient cash flow from operating to meet sukuk obligations and capex. For the upcoming debt obligation of RM30 million in November 2019, there are sufficient funds in the reserve account of RM117.7 million as at end-September 2019.

Copyright Press Releases 2019